Housing’s ‘Wealth Effect’ Isn’t What It Used To Be

The improving housing market is beginning to serve as a tailwind for the economy after years of dragging on growth. The Commerce Department reported on Tuesday that new-home sales were up by 29% from one year ago in January, and the S&P/Case-Shiller index that tracks home cities in 20 metro areas showed that prices were up by 6.8% from one year ago in December.

But one of the housing sector’s most effective multiplier effects on the economy—the so-called “wealth effect” in which people spend more because they feel richer as the value of their home (or stock portfolio) increases—could be muted for the next few years, according to economists at investment bank Credit Suisse.

Housing contributes to the economy in two main ways. The most direct contribution comes from home construction and improvement. But it also drives consumer spending through housing’s wealth effect, which is seen most directly when borrowers tap into their home equity to fund everything from vacation and college tuition to home renovations and dinners out.

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